If you are a vendor, you probably already use a channel to go to market. But have you ever stopped to ask “why?”
For most companies, the channel has been in place for so long, it’s just part of the furniture. However, an unclear vision of the role of the channel (and inconsistency within your company as to why you use an indirect go-to-market model) is in many cases the primary reason for a non-performing channel. In other words, the reason your channel isn’t working may be due to the fact that you (and hence they) don’t really understand what you expect of them.
This article examines the reasons why vendors use a channel, the different benefits that channels provide, and what you can do to build a foundation for a high performance channel
Why do vendors use channels?
There are many reasons that vendors use channels, but these can be usually be grouped into three key categories:
- Reduce Cost
- Product Lifecycle Management
- Customer Reach
Contrary to popular belief, distribution and indirect channels should be used to increase sales while reducing cost! For example, it is certainly a lot less expensive to speak to 50 resellers who in turn speak to 500 customers, than to establish your own direct sales team to speak to all those customers yourself. Similarly, taking a portion of space in a distributor’s warehouse is much more viable than setting up your own warehouse (no to mention the systems to cope with inventory management and logistics). The objective therefore is to shift functions or services to channel partners that can deliver an equal (ie. customer satisfaction is not compromised) service at a lowest cost.
However, while partners may provide a certain service for a lower cost than the vendor may be able to, that doesn’t mean it’s free. Partners still need to be profitable. A mistake that many vendors make is to look at the margin their partners are making and say “10% margin is enough – all they’re doing is taking orders”. But our industry is littered with vendors who have moved to a direct channel model, or reduced reseller margins (and hence alienated partners), only to discover that the supposedly huge margins their partners were making were still less than what it costs the vendor to do it themselves.
Only by truly understanding all the services that a partner is providing, and having a clear understanding of your end-user’s as well as your internal cost structure, can you begin to determine the margin your partners need to make.
Product Lifecycle Management
We’ve just seen how a key role of the channel is to get the product to the customer in the most efficient and effective manner. The challenge is however, as the product matures and becomes easier to use, it transitions through the various lifecycle phases, and the types of customers change. Which means that the channel required to service those customers also changes.
For example, in the early stages of a product’s lifecycle, products are typically clunky to use and difficult to support. As products mature, they become easier to use, and customers have enough experience with similar technologies that they require little or no support. Look at any technology that’s been around for more than 5 years (Wi-Fi, MP3 players, Word processors) and compare how easy they are to use today compared to when it was first released.
This has enormous implications for the channel. If your product is very technical, or requires integration with other systems, you may need a VAR or Systems Integration channel that has knowledge of other products and the technical skills to make it work. Conversely, if your product is a mature product in an established market, your channel may not need to be technical at all (eg. retail). In addition, as products mature, customer knowledge increases. This means that they require less assistance from resellers, and are therefore more likely to buy on price, leading to decreasing channel margins. Therefore a Systems Integrator is unlikely to be focused on selling simple “shrink wrap” products.
Understanding the level of maturity of your products is an essential element in deciding which partners (and there may be more than one type if you have products at different degrees of maturity) are best suited to selling your products.
As the product evolves, not only does the type of customer change, but the experience they expect from your product also changes. In the early stages of the lifecycle, the types of customers you will have are more likely to be risk takers. They aren’t afraid of rolling up their sleeves and putting in the effort to make your product work because they see a benefit in doing so (or they just like playing with leading/bleeding edge technology). However, laton, we start to see customers who will only buy the product once everyone else has one. They want to be able to buy it easily, have it work seamlessly, and not pay too much for it.
That means having partners who can reach the different types of customers who may want your product. So if your product is a specialist product, you may need partners who have expertise in specific industry segments or sell complementary technologies. However, if your product addresses many market segments, geographical coverage and convenience become more important. And if your product is a technical solution, the types of partners you need to install it into an enterprise environment are going to be quite different to those servicing the SMB space.
Clarity on customer segmentation, the customer’s expectations, the type of experience they are looking for, and the sales cycle all need to be determined by the vendor before deciding what types and number of partners are required.
Depending on your reasons for wanting to sell through a channel, your approach to channel recruitment and management will vary dramatically. Your objectives will impact the types and number of partners you need to recruit, the activities you expect, the margin you provide, and the measures of success you need to monitor.
So that means you actually need to stop and think about why you have a channel. But more importantly, you have to make sure that everyone else in your organisation is on the same page. Inconsistency within an organisation about the role of the channel is usually the first and fundamental reason for a dysfunctional channel.
Take an organisation where the Finance Dept believes that the role of the channel is to carry stock and provide credit, the Marketing Dept believes it is lead fulfilment, and Sales believe it is to integrate the product into a more complex sale. So Finance expect the channel to be logistically efficient and operate on lower margins, Marketing expect the channel to invest in demo equipment to run pilots, and Sales expect the channel to invest in training to understand and install the product into difficult scenarios. In effect, we have three different groups within your company with three different expectations, behaving in three different ways, and monitoring three different aspects of what they perceive as a “successful” channel.
A successful channel does not happen by accident. It’s not just a matter of signing up more partners and hoping that sales will come. So before you recruit those new partners or implement that new program, stop and think about why you’re doing it. What are the implications in terms of cost structure, product maturity and customer reach? Does everyone in your company feel the same way? If you can get the answers to those questions right, you’ve established a very strong foundation to build a high performance channel.